Will Apple's iPhone Trade-In Program Work?

For months, speculation has been growing that Apple (AAPL 1.27%) will introduce a lower-cost iPhone for emerging markets. Apple's growth has tailed off recently, as the U.S. market is starting to become saturated and relatively few people in emerging markets can afford even an iPhone 4 without a carrier subsidy.

However, as I wrote back in April, a cheaper iPhone will still be very expensive compared with the legions of Android phones available for $199 or even $99 without a subsidy. If Apple introduces a lower-cost iPhone, $329-$349 seems like a reasonable price range to expect, while analysts at Morgan Stanley think that the unsubsidized price could be as high as $399.

Apple may be about to unveil a program that could boost sales in the U.S. and other developed markets while also increasing adoption of the iPhone in developing countries. According to Bloomberg, iPhone owners will be able to trade in iPhone 4 and iPhone 4S devices at their local Apple Store for a credit toward a new phone purchase. The trade-in could potentially cover the full subsidized cost of an iPhone 5, which is $199 at most carriers.

The iPhone 5. Source: Apple.

Apple would then refurbish (if necessary) and resell the old iPhones in emerging markets. Doing so could potentially help Apple supply sub-$300 iPhones to developing countries on a large scale, which could increase iPhone adoption there and create a loyal user base over time. At the same time, by making it easy to trade in an old iPhone, Apple would speed up the upgrade cycle in the U.S. If executed well, this program could provide a significant boost to Apple's growth.

A promising program
The U.S. telecom industry already encourages frequent upgrades for smartphone users, because of the nature of the subsidy system. T-Mobile USA (TMUS 0.57%) hopes to change that situation with its new plans that unbundle the cost of your phone from the cost of your data plan, but it's still a relatively small carrier compared with behemoths Verizon (VZ -0.53%) and AT&T (T 1.88%).

Still, as smartphones have rapidly become "good enough," some consumers have chosen to keep their old phones running longer rather than paying $199 for the new top-of-the-line model. Thus, while the new iPhone 5 offered LTE capability and a larger screen than previous models, sales have been underwhelming. In fact, roughly half of Verizon's iPhone sales since the iPhone 5 release have been older (i.e., cheaper) models. While any iPhone sale is good for Apple, the company earns a lower profit per device on these older models.

Offering a trade-in program could boost sales of the more profitable iPhone 5, as users due for an upgrade could potentially get the newest model without putting any money down. It would also facilitate early upgrades by providing a "mini-subsidy" to people who like to get the latest and greatest phone every year.

Apple would also benefit by making iPhones available at a lower price in developing countries. The company could conceivably earn a profit while selling a refurbished iPhone 4S abroad for $299 (or even a little less). That would still be significantly more than the price of budget Android phones, but it would be a lot more appealing to consumers than Apple's current entry-level offerings, which can cost $500 or more unsubsidized.

Narrowing the gap between iPhone and Android-based competitors by a little bit could have a big impact on sales. Moreover, if these customers have a good experience with the iPhone, they will be likely to stay within the iOS ecosystem.

The real deal?
Apple hasn't confirmed reports that it will introduce this trade-in program. Even if the reports are accurate, it's possible that only some iPhone users will be able to benefit from it. The AT&T and T-Mobile networks use the global GSM cellular standard, so the iPhones designed for their networks should work in most foreign countries. By contrast, Verizon and Sprint Nextel (S) use CDMA technology that's rare outside of the United States.

Since GSM is an open standard, it should be fairly straightforward to resell AT&T and T-Mobile iPhones in developing countries. By contrast, a Verizon or Sprint iPhone generally wouldn't work abroad. Replacing the modem would probably be prohibitively expensive, since a trade-in price of $199 would be very similar to the cost of building a new iPhone 4 or iPhone 4S. If Apple unveils a trade-in program that's valid only for AT&T and T-Mobile iPhones, it could give those two carriers a leg up over Verizon and Sprint going forward. Customers would begin to reap tangible benefits from using carriers that adhere to a global standard.

We'll probably learn for sure at its Worldwide Developer Conference next week whether Apple is planning an iPhone trade-in program. As a shareholder, I'm hoping that this report is true, as the trade-in program would provide a good way to increase Apple's presence in emerging markets without suffering a big margin hit. It could also boost sales in the U.S. and other mature markets. What do you think? Tell me in the comment box below.